The Key Government hasn’t disabused those of us who imagined it will use fiscal policy to stimulate the economy and help see us through deepening recession. It enthuses publicly about $9 billion, three-year “rolling maul” of measures. Its own contribution to this stimulation, however, largely comprises tax cuts rather than increased government spending or investment. For the rest of the programme, there are regulatory measures (to make it easier for businesses to do business) and an earlier timetabling of the Clark government’s infrastructural development plans.
It doesn’t mind us thinking governments can do plenty, in recessionary times, and that it will do plenty.
On 10 February, Key told Parliament “the New Zealand public is rightfully looking towards our Government to ensure they get through this economic recession”. His Government had taken several steps to provide “much stimulus and support to those in great need”, he said. This included introducing legislation to ensure there were tax reductions from 1 April this year and the ReStart package to ensure the Government can provide extra support to those hard hit by redundancy.
He also mentioned the first phase of the Government’s reforms to simplify and streamline the Resource Management Act and small-business relief package, aimed at helping to lighten the load of small and medium enterprises. He spoke of plans to bring forward number of public infrastructure projects and start several new ones. Oh, and don’t forget the Job Summit, to bring together the private sector, local government, non-governmental organisations, and public sector participants to discuss ideas to keep people in employment.
National MP Nathan Guy asked patsy question about an OECD report, enabling Key to favourably compare the level of fiscal stimulus in New Zealand with that in other OECD countries. “Yes,” he responded, “I have seen report on fiscal stimulus across the period 2007-10 in all OECD countries. That report shows New Zealand having the third-highest fiscal stimulus in the OECD.”
That level of fiscal stimulus was appropriate to the circumstances facing New Zealand. But he had to be careful. Over-doing the fiscal stimulus would result in our running very large deficits and building up levels of government debt “that would be huge burden not just on this generation but on future generations”.
Key’s concerns about rising public debt are important to his policy approach. In the short term, the prospect of excessive debt levels could well bring about downgrade from credit agencies. downgrade would lead to New Zealanders paying higher interest rates, and would risk our having lower growth rates into the future.
He chided Labour leader Phil Goff for wanting to make promises about doing more and spending more – “he should know that the money can come only from debt, given our current cash deficit”.
But the Government has wanted us to think it is being appropriately loose (or stimulatory) with its fiscal policy without encouraging us to look too hard at its spending intentions, even though the global economic recession has quickly deepened since November when the Government took office. Tim Watkin did look hard, however, and summed up his findings on the Pundit blogsite: National would deliver “tax cuts for the rich, tax reform and, er, few new roads. National’s (and to some extent Labour’s) fiscal response to the recession has been small and poorly targeted.”
Key was much more willing to portray himself as fiscal spendthrift when interviewed by the Wall Street Journal’s Mary Kissel. “We don’t tell New Zealanders we can stop the global recession, because we can’t,” he told her. “What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with.”
The idea – the WSJ reported – was to grow nation out of recession by improving productivity, which put Key and his conservative National Party at odds with Washington, Tokyo and Canberra. Those capitals were rolling out billions of dollars in stimulus packages (with taxpayers’ money) to try to prop up growth. Key regarded this as “risky” and “there is actually limit to what governments can do”.
The WSJ welcomed “big government” coming under the gun during the “line-by-line review” of every government department and Key’s commitment to cap new government spending in this year’s budget. “If we want to fund new initiatives, we by definition have to stop [funding] some of the things we don’t think were working,” he said. “We’re just getting better value for money.”
Would the real Mr Key stand up, please?
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
